Oil price: North Dakota Sour worth next to nothing as supply glut bites

I write about energy and industrials for City A.M. I'm particularly interested in geopolitics, energy policy and, of course, the ever lively oil markets.

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Jessica Morris

The economics for producing oil are under pressure (Source: Getty)

The world is set to drown in oil this year, so it's hardly surprising that at least one buyer is pricing oil around the zero mark.

Different types of oil are priced against benchmarks, such as Brent and West Texas Intermediate (WTI), depending on the quality, as well as ease of transportation to a refinery.

"It really is the buyers who are dictating prices. If a supplier can't store it, they can be forced to sell at whatever price they're offered," Dougie Youngson, research director at broker finnCapp, said.

Flint Hill Resources was offering to pay $1.50 per barrel for sour crude from North Dakota earlier this week, Bloomberg reported. But the refiner had previously charged $-0.50, meaning producers would've been paying to store their oil with it.

North Dakota sour is a high-sulfur grade of crude which is very difficult to transport, hence its extremely low price.

While the near-zero price reflects transportation difficulties associated with this very poor quality crude, it also highlights the headwinds facing US oil. WTI has shed more than 70 per cent since June 2014, and it fell below $30 per barrel for the first time in 12 years last week.

“The oversupply of oil must be severe indeed if a refiner is asking to be paid to take away the stuff … or can offer only very low prices for the crude,” Russ Mould, investment director at AJ Bell, told City A.M.

“If the prices really are that low then it must be time for some wells to shut.”

The supply glut has been worsened by Opec's refusal to halt production, in a bid to defend its market share from the US shale gas industry. Earlier today, the International Energy Agency warned oil markets will face "enormous strain" this year.

Jake Reint, a spokesperson for Flint Hills, said that the negative crude oil pricing was an error which was subsequently corrected. However, analysts said $1.50 per barrel was still a really low price, which shows that the economics for producing oil are under pressure.

“Those with crude oil that’s expensive to bring to the market, like the people who are selling North Dakota Sour, some of them are going to stop producing,” Andrew Shepard, an associate at industry consultant Wood Mackenzie, said.